Stocks are moving on share buybacks, splits

Opinion: Financial engineers are driving the market

By

DaveFry

Corporate America is taking what the Fed has given it through its zero interest rate policies (ZIRP).

It’s appealing to corporate chieftains and boards to borrow money at low interest rates and buy back shares. In that way even reduced earnings look impressive over a reduced float or fewer shares. For example, last week IBM reported scaled down revenues and so-so earnings; but, using its $40 billion in cheap debt the company has been buying back a boatload of stock. On Thursday Caterpillar
CAT, +0.98%
announced earnings that beat analyst estimates but top-line revenues were flat year-over-year. Earnings were much higher than expected and the stock rallied.

What’s going on? Take a look at stock buybacks, as the chart below from ZeroHedge shows.

So, are stock buybacks a bad thing? In the short- to intermediate-term, no since it offers better performance for shareholders and insiders. In the long run, companies relying on this aren’t investing for long-term growth and that will hurt in the future.

Earnings news was led by Apple
AAPL, +4.04%
whose shares rallied sharply after earnings news. Here too, the company engaged in some financial engineering by sharply raising share buybacks, increasing the dividend, and declaring a 7 -for-1 stock split scheduled for June. Regarding the latter, some believe a listing on the Dow Jones Industrial Average
DJIA, +0.98%
can’t be far away. There were some weak reports from Qualcomm
QCOM, +1.71%
and Verizon
V, +1.68%
for example.

More earnings news after the close included Pandora Media
US:P
which saw the stock crater on its report while Microsoft
MSFT, +1.67%
rose on its report and Amazon.com
AMZN, +1.21%
which rose sharply during the trading day on Thursday and rose further after the close.

Stocks rose early, fell with Ukraine news and then spent the rest of the day waffling back and forth either side of unchanged. In sum, it was a messy and unproductive Thursday, particularly if you ignored Apple
AAPL, +4.04%
.

Chart of the Day: Below is a daily chart of Apple. There are many chart annotations but I’d draw your attention to two proprietary indicators. The first is the prior high (HI) indicator completion for February 18 and the next is the low (LO) indicator completion for April 16. Both effectively gave investors a heads-up as to trend changes.

The top 20 market movers by percentage change in volume whether rising or falling is available daily.

Volume was once again below normal levels especially given all the news reports. Breadth per the WSJ was mixed to negative.

The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

The VIX
VIX, -3.09%
is a widely used measure of market risk and is often referred to as the "investor fear gauge.” Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

Markets were pulled in many directions Thursday as positively viewed results from Apple in particular dueled with Ukraine rumors and poor overall leadership within markets. In sum, it was an inconsistent trading day.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.